Mark Zandi, chief economist at Moody’s Analytics, has warned that a recession may be difficult to avoid if oil prices remain elevated.
The analyst based this warning on the firm’s machine-learning–based leading economic indicator, which currently puts the probability of a recession within the next 12 months at 49%.
The increase has been driven largely by weakening labour market data, alongside broader signs of softness across key economic indicators since late last year.
However, in a March 16 post on X, Zandi noted that rising geopolitical tensions in the Middle East, particularly involving Iran, have further heightened risks by pushing oil prices higher.
In this context, energy prices remain a critical factor in recession forecasting, with historical patterns showing that most post–World War II downturns, excluding the pandemic recession, were preceded by significant spikes in oil prices.
“Despite mounting evidence that the economy is struggling and recession risks are high, economists will be loath to utter the word ‘recession’. Many were sure a downturn was imminent in the wake of the Fed’s monetary tightening a couple of years ago, vocally said so, but were wrong. However, if oil prices remain elevated for much longer (weeks and not months), a recession will be difficult to avoid,” Zandi said.
Past lessons on oil and recession
While the modern economy is less structurally vulnerable to energy shocks than in the past, higher oil prices continue to weigh heavily on consumers, eroding purchasing power quickly. This comes as households are already showing increased caution in their spending.
Although economists have been hesitant to signal an imminent downturn after earlier recession forecasts proved premature during the period of monetary tightening, sustained elevated oil prices over the coming weeks could intensify economic strain, increasing the likelihood of a recession.
Notably, his warning comes as Brent crude oil prices have climbed nearly 50% since late February, trading around $103 per barrel, after brief spikes above $110, amid the U.S.–Israel conflict with Iran that is disrupting Middle East energy supplies.
This has been driven by Iranian actions, which have effectively halted most tanker traffic through the Strait of Hormuz, the chokepoint for about 20% of global oil trade, forcing Gulf producers to slash output by millions of barrels per day. The IEA has called it the largest oil supply disruption in history.
To this end, U.S. gasoline prices have jumped, pushing inflation higher and raising costs for transport, food, and goods. Economists warn of slower global growth, with risks of stagflation if disruptions persist.
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